Forth Quarter 2017 Overview

Forth Quarter 2017 Overview

Market Overview

Amidst a backdrop of unusually low volatility, United States and a broad swath of world equity markets rose sharply during 2017, based upon the expansion of 45 separate global
economies. The US broad market advanced 20.52% for the year, 6.2% coming during the final quarter. Developed international and emerging international markets climbed 25% and 37% respectively during 2017, while posting end of quarter gains of 4.23% and 7.44% respectively.

For the year, the DJIA posted its 2nd biggest year over the past 10 years rising by 25%, and a whopping 10.33% during the 4th quarter alone. The Dow was led by Boeing, Caterpillar, Apple, Visa and Walmart. S&P 500 companies grew their earnings by over 14% during 2017. The total return of the S&P 500 index was nearly 22%, of which 6.64% came during the 4th quarter.

For the year the NASDAQ composite was the best performing US stock index, up 29.64% for the year; although the DJIA was the top performing equity benchmark during the 4th quarter. The small cap Russell 2000 gained 14.7% total return in 2017, and closed at an all-time high on December 28th 2017.

Repatriation

Many US companies will be booking tax related charges to earnings in the fourth quarter as they pay a one- time tax of 15% in order to bring their overseas cash back into the US. By way of example, Goldman Sachs had more than $31 billion parked offshore at the end of 2016; accordingly they will book tax related charges of $5 billion related to the entire corporate tax overhaul inclusive of deferred tax write downs. But they and other multinationals will enjoy what is now the lowest corporate tax rate in the past 80 years. According to the WSJ, S&P 500 Companies will take one time 4th quarter charges amounting to $235 billion on the $2.8 trillion cash they have amassed from foreign operations.

A rally in emerging markets helped international stocks soar in 2017, partially attributable to a largely weak US dollar, which favors US multinationals with foreign earnings as well as international equities. The US dollar declined by 7.5% against a basket of major currencies, its biggest annual decline since 2007. Accordingly, the trajectory of the US dollar in 2018 is something global investors need to keep a keen eye on in the year ahead.

Fixed Income

With persistent low inflation, the 10 Year Treasury remained in a tight range despite 3 rate hikes, and ended the year with a yield of 2.409%, just .03 percentage points lower than the 2.44% it finished at 12/31/16. A rise in short term treasury rate yields combined with an ever flattening longer rate curve could possibly be viewed as a sign of caution, as the difference between the two is the smallest in a decade. During 2017 municipal bonds outperformed (plus 5.45% total return), making up from subpar performance during 2016.

Commodities

Crude Oil closed the year above $60 per barrel the first time in 2.5 years settling at $60.42 and ending the year up 12.5%. Gold prices had its biggest yearly gain since 2010 with a 13.6% return, closing the year at $1,306.30.

2018 Playbook

Looking forward to 2018, two important items investors should be cognizant of include US wage inflation, and as mentioned previously, the direction of the US dollar. Despite an extremely low unemployment rate of just 4.1%, wages have only risen by approximately 2.5% during 2017. Faster wage growth would undoubtedly force the Federal Reserves’ hand to increase rates at a faster pace, which could prove troubling for both the US bond and equity markets. As far as the US dollar, its 2017 decline coincided with the global economic expansion. The dollar could reverse direction in light of the just passed corporate tax reform, which includes a strong repatriation of US dollars from overseas markets, or it could continue to slide based upon projected ever growing deficits. Historically, an inverted yield curve has been viewed as an indicator of a pending recession; however, this condition alone does not mean a recession is eminent. Most of the world is in early to mid-cycle recovery whereas the US expansion while admittedly in the latter stages, still looks promising as earnings have accelerated on a year over year basis.